Cabby Capitalism

Andrew Murstein, president of Medallion Financial, which lends to people buying taxi medallions. His father founded the bank in the 1950s.

I remember the first time I heard a cabby brag about his genius medallion investment. In just five years, the value of his city-issued taxi operator’s license had tripled, to $300,000. “Boy,” I thought. “I really should look into that”

Andrew Murstein, president of Medallion Financial, which lends to people buying taxi medallions. His father founded the bank in the 1950s.
Yes, I really should have. Since 2001, the value of a corporate medallion (the kind you can own without personally driving a cab) quadrupled, to $825,000. Values have risen so steeply that the combined value of the city’s 13,237 medallions now tops $10 billion. That’s bigger than J.C. Penney, bigger than Whole Foods, bigger than ConAgra. If New York medallions traded on the NYSE, they’d qualify as a large-cap stock.

Not surprisingly, with all that money driving around, there’s a whole cottage industry in place to support medallion investors. New York boasts 26 licensed medallion brokers and 69 medallion-leasing agents. We’ve even got a slew of lenders and a midsize bank dedicated to—you guessed it—medallion loans.

Medallion Financial (Nasdaq: TAXI) has a tagline: “In niches there are riches,” and President Andrew Murstein says business is booming. Since his father, Alvin, a former fleet operator, founded the bank back in the 1950s, it’s made $5 billion in medallion-backed loans, with zero losses. It’s hard to repossess a house, but it’s easy to repossess a medallion: You just hire a repo man to pluck it off the taxi’s hood.
It all sounds a little gritty, but Mr. Murstein does his lending from a supersize corner office with glamour views on Madison Avenue, and the company’s board of directors includes Hank Aaron and Mario Cuomo. Mr. Murstein enjoys suggesting that his old NYU biz-school buds, who went to work for the likes of Bear Stearns, might be a little sorry they didn’t get into the cab business. Or invest in medallions. Since Grandpa Leon Murstein paid $10 for his first medallion back in 1937, sources say, the family has amassed more than 200 licenses, which puts the family’s wealth at roughly five-hundred-zillion-gajillion dollars.

Still, there’s a good reason medallion investing hasn’t hit the mainstream: the city’s Taxicab Owner Rules handbook. That’s where you’ll encounter 93 pages of rules and regulations governing medallion ownership and taxi operation, including a seven-page schedule of penalties and fees. Turns out, you can’t just put your medallion in a drawer and wait to get rich—you have to put your license on the road

Taxi medallions
For that reason, many corporate medallion owners are either fleet owners or hire a leasing agent—a garage owner who acts as a middleman between medallion investors and cabbies who provide their own cars. The agents take care of pesky details such as insurance and driver negotiations. They also take a big cut of the revenue. Even with the city’s cap on leasing rates ($105 for a 12-hour day shift) one could conceivably earn $5,000 a month in lease income. But agents typically arrange long-term leases, which command lower rates; After paying their commission, you’ll be lucky to clear $2,500.
Even buying the medallion itself can be a murky, difficult business. For one thing, you have to purchase two corporate medallions at a time—a steep buy-in. Moreover, only 500 or so change hands every year, and there’s no central exchange for medallion trades. Heck, you can’t even track down the owners. For liability reasons, folks who own multiple medallions usually create separate corporations for each license—often with fanciful names like Spoiled Rotten Trans Inc., Granny Hacking Corp. and Excuse My Taxi. Enter the medallion broker.

Bob Schlageter, who owns Metran Medallion Sales in the East Village, says it takes patience to buy a medallion. Like most brokers, he has a long waiting list of would-be buyers. When a medallion becomes available, he’ll research it for liens and judgments, then shop the license to his wait list, looking for a buyer who will meet the owner’s asking price. The typical broker commission—$5,000 to $10,000—is split between the buyer and seller.

Interested? Here’s the rough math: These days, the typical medallion investor puts 25% down and borrows the remainder at 6%. At those rates, the lease income doesn’t even cover the finance charges. But if medallion values continue climbing at historic rates (an 11% annualized return since the 1970s), you’re earning at least $80,000 a year on your $206,000 down payment.

That’s a big if. Yes, the huge upsurge in value rests mainly on the city maintaining a lid on supply, and Taxi and Limousine Commissioner David Yassky says there’s no plan to issue new medallions. On the other hand, cynics say prices have been inflated by medallion owners who drove up the value of their existing portfolios by deliberately overpaying for additional licenses.

My thinking? If I’m writing about it, it’s probably already a bubble. I’ll wait for the medallion meltdown before I buy in.

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